2010 (9) TMI 1152 - AT - Income Tax

Additional depreciation u/s. 32(iia) - computer embroidery machine - assessee claimed that it is manufacturing concern entitled for additional 20% depreciation - According to AO in view of details furnished, it is engaged in the business of embroidery work on job work basis which is not a manufacturing activity - CIT(A) allowed the claim - HELD THAT - The expressions manufacture and produce have not been defined in the Act at the relevant point of time but the dictionary meaning of manufacture is to transform or fashion new material into a changed form for use. Because of the above operations carried out by assessee, the look of the fabric is changed substantially and the new article is commercially known differently from the original fabrics. Even otherwise, the word product has a wider connotation than the work manufacture Considering decision in the case S.S.M. Brothers (P) Ltd. Others v. CIT 1999 (1) TMI 2 - SUPREME COURT held that Sec.32(1)(iia) also provides for additional depreciation in respect of new machinery and plant purchased by assessee who is engaged in the business of manufacture of production of any article or thing. In the above case the Hon ble Supreme Court has already held that assessee was using machinery in production of processed textile i.e. embroidery work and thus, the fact embroidery work is regarded as production cannot be denied. Additional depreciation claimed by assessee is required to be allowed as plant and machinery is used in the production of embroidery fabrics. Disallowance of interest expenditure - assessee has taken huge interest bearing loan, therefore, why the interest be not disallowed to the extent of 12% on this sale amount of outstanding in the case of sister concern - assessee replied that it is a commercial transaction - HELD THAT - As find that factually this is a commercial transaction and now before me the Ld. SR-DR could not adduce anything that this transaction is a loan or deposit given to sister concern. In the absence of anything CIT(A) has rightly deleted the addition holding the transaction as commercial transaction. Accordingly, confirm the order of CIT(A) on this issue and Revenue s issue is dismissed.

Summary

Issues involved:
1. Deletion of addition made by Assessing Officer on account of disallowance of claim of additional depreciation.
2. Deletion of addition made by Assessing Officer on account of disallowance of interest expenditure.

Issue 1: Deletion of addition made by Assessing Officer on account of disallowance of claim of additional depreciation:

The Revenue appealed against the CIT(A)'s decision to delete the addition made by the Assessing Officer regarding the disallowance of the claim of additional depreciation. The Assessing Officer disallowed the additional depreciation claimed by the assessee engaged in embroidery work on a job work basis, stating that it was not a manufacturing activity. The assessee claimed additional depreciation under Section 32(1)(iia) of the Income-tax Act, 1961. The CIT(A) allowed the claim based on the decision of the Hon'ble Supreme Court in a similar case. The Tribunal upheld the CIT(A)'s decision, emphasizing that the embroidery work undertaken by the assessee involved various stages resulting in a new article with different commercial value, qualifying as production under relevant provisions. The Tribunal also noted that the machinery used by the assessee was entitled to development rebate, supporting the allowance of additional depreciation. The Tribunal concluded that the additional depreciation claimed was valid, dismissing the Revenue's appeal.

Issue 2: Deletion of addition made by Assessing Officer on account of disallowance of interest expenditure:

The second issue involved the deletion of the addition made by the Assessing Officer on account of disallowance of interest expenditure. The Assessing Officer disallowed the interest expenditure based on a transaction involving a sister concern where an embroidery machine was sold in installments. The Assessing Officer questioned the nature of the transaction due to the interest-bearing loan taken by the assessee. The CIT(A) disagreed with the Assessing Officer, considering the sale of machinery as a commercial transaction and deleting the disallowed interest. The Tribunal upheld the CIT(A)'s decision, emphasizing that the transaction was indeed a commercial one and not related to a loan or deposit given to the sister concern. As the Revenue failed to provide evidence contrary to the commercial nature of the transaction, the Tribunal confirmed the deletion of the disallowed interest expenditure. Consequently, the Tribunal dismissed the Revenue's appeal.

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